CHAPTER 2 OPERATIONS PERFORMANCE

Why is operations performance vital in any

organisation?
First, operations management is concerned with doing things better, which
can make operations the driver of improvement for the whole organisation.

Second, it can build the ‘difficult to imitate’ capabilities that can have a
significant strategic impact.

Third, operations management is very much concerned with ‘process’,

with how things are done.

Performance at three levels

1) Long-term (strategic level) = how an operation can contribute to the

organisation’s overall strategy

2) Societal level = uses the idea of the ‘triple bottom line’

3) Operational-level = uses the five operations ‘performance

objecctives’

Operations principle
Good operations performance is fundamental to the sustainable success of
any organisation.
How is operations performance judged at a societal
level?
The decisions that are made within any operation and the way it goes
about its day-to-day activities will affect a whole variety of ‘stakeholders
’.

 Some stakeholders are internal, for example the operation’s

employees

 Others are external, for example customers, society or

communitygroups and a company’s shareholders

 Some external stakeholders have a direct commercial relationship

with the organisation, for example suppliers and customers

 It is always the responsibility of operations managers to understand

the (sometimes conflicting) objectives of its stakeholders.

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 Operations principle: All operations decisions should reflect the interests of
stakeholder groups.

Corporate social responsibility (CSR)

It is concerned with understanding, heeding and responding to the needs of

all the company’s stakeholders. CSR is fundamentally about how business
takes account of its economic, ethical, social and environmental impacts in
the way it operates.

The triple bottom line

An approach to assessing an organisation’s performance is the ‘triple

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bottom line’ (TBL, or 3BL), also known as ‘people, planet and profit’.
The idea is that organisations should measure themselves not just on the
traditional economic profit that they generate for their owners, but also on
the impact their operations have on society (broadly, in the sense of
communities, and individually, for example in terms of their employees)

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and the ecological impact on the environment. In other words, it balances
economic, environmental and societal interests.

Environmental, social and governance (ESG)

it treats CSR performance from an investor’s perspective. It reflects the
idea that any potential investor in an enterprise should focus on all ethical
social and environmental factors rather than simply looking at the ‘return’
on that investment.

The social bottom line (people) – the social account, measured

by the impact of the operation on the quality of people’s lives

The idea behind the social bottom line is that it is self-evident. Businesses
should accept that they bear some responsibility for the impact they have
on society and balance the external ‘societal’ consequences of their actions
with the more direct internal consequences, such as profit. At the level of
the individual, social bottom line performance means devising jobs and
work patterns that allow individuals to contribute their talents without
undue stress. At a group level, it means recognising and dealing honestly
with employee representatives.

Some ways that operations can impact the social bottom line performance
include the following:

▶Customer safety from products and services.

▶Employment impact of an operation’s location.
▶Repetitive or alienating work.
▶Employment implications of outsourcing.
▶Non-exploitation of Global South suppliers by Global North companies.
▶Staff safety and workplace stress.

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The environmental bottom line (planet) – the environmental
operation
account, measured by the environmental impact of the
operation

Environmental sustainability means making sure that the benefits from

development actions more than compensate for any direct or indirect loss
or degradation of the environment. Put more directly, it is generally taken
to mean the extent to which business activity negatively impacts the
natural environment.

Some ways that operations can impact the environmental bottom line
performance include the following:

▶Recyclability of materials, energy consumption, waste material

generation.

▶Reducing transport-related energy

▶Noise pollution, fume and emission pollution. Reducing transport-related

energy.
▶Obsolescence and wastage.
▶Environmental impact of process failures. Recovery to minimise impact
of failures.

▶Recovery to minimise impact of failures.

The economic bottom line (profit) – the economic account,

measured by profitability, return on assets, etc., of the
operation

The organisation’s top management represent the interests of the owners

(or trustees, or electorate, etc.) and therefore are the direct custodians of
the organisation’s economic performance. Broadly this means that
operations managers must use the operation’s resources effectively.
Finance specialist have devised various measures (return on assets, etc.).

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Some ways that operations can impact the financial bottom line
performance include the following:

▶Cost of producing products and services.

▶Revenue from the effects of quality, speed, dependability and flexibility.
▶Effectiveness of investment in operations resources.
▶Risk and resilience of supply.
▶Building capabilities for the future.

How is operations performance judged at a strategic

level?
All operations should be expected to contribute to their business at a strategic
level by controlling costs, increasing revenue, making investment more
effective, reducing risks and growing long-term capabilities.

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Net promoter score (NPS)
One popular method of measuring the underlying levels of customer
satisfaction (an important factor in determining revenue) is the ‘net
promoter score ’ (NPS). This is computed by surveying customers and
asking them how likely they are to recommend a company, service or
product (on a scale of 1 to 10, where 1 = not at all likely, and 10 =
extremely likely). Customers giving a score of 1 to 6 are called
‘detractors’, those giving a score of 9 or 10 are called ‘promoters’ and
those giving a score of 7 or 8 are called ‘passives’. The NPS is calculated
by ignoring passives and subtracting the number of detractors from the
number of promoters. So, if 200 customers are surveyed, and 60 are
promoters, 110 passives and 30 detractors, the NPS is calculated as
follows:

NPS= 60 – 30 -- =30

What is considered an acceptable NPS varies, depending on the sector and

nature of competition, but as a minimum target, a positive (>0) score
might be regarded as (just) acceptable.

How is operations performance judged at an

operational level?
running operations at an operational day-to-day level requires a more
tightly defined set of objectives. These are called operations‘performance
objectives ’. There are five of them and they apply to all types of
operation.

1) Quality: Satisfying customers by providing free goods and services

that are ‘fit for their purpose’. Hence, this gives a quality advantage.

2) Speed: doing things fast, minimising the time between a customer

asking for goods or services and the customer receiving them in full,
thus increasing the availability of your goods and services and
giving a speed advantage.

3) Dependability: Dependability means doing things in time for

customers to receive products or services exactly when they are
needed, or at least when they were promised.

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 4) Flexibility: Being able to change what you do; that is, being able to
vary or adapt the operation’s activities to cope with unexpected
circumstances or to give customers individual treatment.

5) Cost: doing things cheaply; that is, producing goods and services at a
cost that enables them to be priced appropriately for the market
while still allowing for a return to the organisation.

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Agility: Means being able to sense changes in the (internal or external)
environment of an operation and respond effectively, efficiently and in a
timely manner. In some other definitions, capability of being able to
survive and prosper in a competitive and/or turbulent environment of
unpredictable, continuous change by reacting quickly and effectively to
those changes. In many ways, agility is really a combination of all the five
performance objectives but particularly cost, flexibility and speed.

The polar representation of performance objectives

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the scales that represent the importance of each performance objective
have the same origin. A line describes the relative importance of each
performance objective. The closer the line is to the common origin, the
less important is the performance objective to the operation.

How can operations performance be measured?

Any operation needs to measure how well, or badly, it is doing. This is
performance measurement. It is the process of quantifying action, where
measurement means the process of quantification and the performance of
the operation is assumed to derive from actions taken by its management.

Performance measurement, as we are treating it here, concerns three

generic issues:

▶What factors should be included as performance measures?

▶Which are the most important performance measures?

▶What detailed measures should be used?

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What factors should be included as performance measures?

The balanced scorecard approach

Arguably, the best-known performance measurement approach, and one

used by many organisations, is the ‘balanced scorecard ’ (BSC). The
framework they developed covers both strategic and operational levels. As
well as including financial measures of performance, in the same way as
traditional performance measurement systems, the balanced scorecard
approach also attempts to provide the important information that is
required to allow the overall strategy of an organisation to be reflected
adequately in specific performance measures. In addition to financial
measures of performance, it also includes more operational measures of
customer satisfaction, internal processes, innovation and other
improvement activities.

In particular, it is argued that a balanced range of measures enables

managers to address the following questions;

▶How do we look to our shareholders (financial perspective)?

▶What must we excel at (internal process perspective)?
▶How do our customers see us (the customer perspective)?
▶How can we continue to improve and build capabilities (the learning and
growth perspective)?

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Advantages of BSC: The advantages of the approach are that it presents an
overall picture of the organisation’s performance in a single report and, by
being comprehensive in the measures of performance it uses, encourages
companies to take decisions in the interests of the whole organisation
rather than sub-optimising around narrow measures.

How do operations performance objectives trade off

against each other?
Most notably better quality, speed, dependability and flexibility can
improve cost performance. But externally this is not always the case. In
fact, there may be a ‘trade-off ’ between performance objectives. In
other words, improving the performance of one performance objective
might only be achieved by sacrificing performance in another.

But there are two views of trade-offs. The first emphasises ‘repositioning’
performance objectives by trading off improvements in some objectives
for a reduction in performance in others. The other emphasises increasing
the ‘effectiveness’ of the operation by overcoming trade-offs so that
improvements in one or more aspects of performance can be achieved
without any reduction in the performance of others.

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Most businesses at some time or other will adopt both approaches. This is
best illustrated through the concept of the ‘efficient frontier ’ of
operations performance.

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